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The Yorker’s politics team recognises that economics is not the easiest topic to get your teeth into. Yet we also feel an understanding of economics can benefit everyone. This column aims to demonstrate why. Cutting through the jargon, we hope to provide economic solutions to everyday student problems.
During my first year, a friend of mine came to me with a problem. Why, he asked me, does my flatmate who lives next to me play loud heavy metal music until three in the morning? As a chemistry student, it made 9:15 seminars a lot less appealing to him. This is not an isolated problem; one of the main complaints of halls residents is often the inconvenience of their housemates taste in loud music.
So how can economists help? Well they would class this as a case of market failure, where the natural result of market economics creates rather than solves problems. This happens, they argue because of a problem known as “negative externalities”, where the price of an item (or “good” as an economist would call it) does not reflect the impact it has on wider society.
In this case, the good is enjoyment, as through the playing of loud music, the flatmate is trying to make enjoyment for themselves. The price of this good for the individual consuming it is purely what economists call “private costs”, the cost of a music player, the cost of the music and the cost of staying up late. Obviously, these are all very small costs. The “private benefit” for the individual consuming the enjoyment is obvious; they are happy and have enjoyed some of their favourite tunes.
A rational individual does not consider what economists call the “social cost” of their production and consumption of the good. That is the cost of their playing loud music to their neighbours. Thus they will over-consume the good (in this case play their music till early hours in the morning) as they only consider the private cost, not the social cost.
To truly solve this problem, we must consider what economists call “marginal social costs” and “marginal private benefits”. A marginal social cost is the additional cost created by the last bit of the good being consumed. In this case, the marginal social cost is the unhappiness my friend experienced from the last hour of music his neighbour played. Obviously, the longer the music was played, the greater unhappiness my friend experienced from that last hour – music ending at 12pm is less annoying than music ending at 3am.
Conversely, the marginal private benefit is the benefit the neighbour got from playing the music. This works the other way, the longer you play the music (so economic theory tells us) the less you enjoy the last hour of it. Economists call this “diminishing marginal returns”.
For the music to stop having these externalities, you should only play the music where the last hour of music brings the same amount of happiness to the neighbour as it brings unhappiness to my friend. Once the music brings more annoyance to my friend than it does benefit to the user, it’s time to stop. In other words, you should only consume where the marginal social cost equals the marginal private benefit. Yet my friends’ neighbour will only stop when the cost to the neighbour of another hour is greater than the benefit they get from it.
So how does economics make sure they don’t over-consume? Economists would likely propose a tax (such as on polluting companies), so that the marginal private cost is increased to the same level as the marginal social cost. Therefore the levels of consumption from the neighbour will be the same as the optimal consumption level.
In this example, the college provost could fine anyone who plays music past midnight, with the fine increasing the further you get away from midnight to reflect the unhappiness of your neighbours. If Vanbrugh College had enforced this, my friend may well have been a bit more alert in his early morning seminars!
Now explain why my housemate only ever listens to the SAME album on REPEAT! With the window adjacent to mine open!
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